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More on the “Yale Model”

Matthew C. Klein of Bloomberg View has a new piece up on the “Yale Model” of endowment investing. The Yale Model is so-called because of the influence of David Swensen, long-time head of the Yale Endowment. Swensen’s book, Pioneering Portfolio Management, is essential reading for institutional money managers and especially endowment managers. The Yale Model is widely imitated by endowments, pensions and other institutions. Many advisors who work with individual investors claim inspiration from the Yale Model too. Here is Klein’s conclusion.

A few institutions have done very well buying exotic assets, paying high fees for the world’s best money-managers and using the proceeds to fund a significant chunk of their operating expenses. (Even the Yale endowment, however, has underperformed the S&P 500 over the past five years.) Most, however, will never be able to accomplish this. Instead, they will buy overpriced boondoggles and pay high fees to have their money managed by mediocre traders. These institutions would be better off putting their assets into index funds that charge low fees and track liquid markets.

I wrote about the Yale Model in-depth here. It’s a lengthy piece with a lot of supporting detail. My conclusion follows.

The available evidence provides a pretty good case for the idea that the Yale Model is past its peak due to overcrowding. A more traditional approach may simply make more sense, even if such an approach is decidedly less “sexy,” especially for those who don’t have Yale’s access and expertise.